A Guide to IT Value Methodologies

When a company buys a new fleet of delivery trucks, it can predict with reasonable accuracy how much more revenue it will generate by delivering more goods more quickly to more customers. That can make it easier to justify the investment. It’s rare, however, to find a CIO who can produce similar numbers for IT investments.

“As recently as two years ago, companies made IT investments to reduce cost, enhance productivity or solve specific business challenges,” says Thomas Pisello, president and CEO of Alinean, an Orlando, Fla.-based valuation consultancy. “Now with today’s economic climate, CIOs are under a lot of pressure to justify that budget and put a measure on value that may not be obvious.”

One way to make the value of IT more obvious is to adopt a logical, repeatable framework; a valuation methodology. This framework helps identify and nurture those investments that ultimately contribute directly to the financial health of the organization. CIOs who have adopted these models say that they help establish a clear connection between IT and business strategy, link technology initiatives to shareholder value, facilitate negotiations with the CFO, and ultimately help them get more money for IT and spend it where it does the most good.

IT managers have it especially difficult when the business discussion moves from the subjective to the objective. Technology investments are often more expensive than they first appear, and the value they deliver is more difficult to measure. “IT buying is fundamentally more complex because of the range and quantity of inherent hidden costs and soft benefits,” says Pisello.

For sanity’s sake, we’ve divided the major methodologies into three categories: traditional, qualitative (also called heuristic) and probabilistic. Some techniques, like Economic Value Added (EVA), are more akin to building blocks than methodologies. Others, like Balanced Scorecard, try to be full-blown performance-management systems that cover everything from goal setting to incentive compensation. Whatever methodology you choose, keep in mind that the overarching goal of valuation is simple: to draw a direct line between IT investments and the enterprise’s bottom line.

Which One Is for You?

We’ve zeroed in on each plan as best we can, but it’s simply not possible to make a statement like, Portfolio Management is best suited for Web-based pizza delivery businesses. Choosing a valuation plan has at least as much to do with the way you, your department and your organization operate as it does with the individual merits of each approach, practitioners say.

Take a good look at how other functions in your organization value their investments. Douglas Hubbard is one of several analysts who express frustration at IT’s occasional lack of perspective. “You don’t have to dummy your numbers down,” Hubbard insists. “It’s time for IT to catch up with the business side.”